Airlines — Led at the Start By the U.S. — Have Been Instruments of Government

This isn’t my preferred way of fostering commerce, but the history is clear that airlines have been intertwined with governments since their inception. Air power was viewed as an important military tool. Government was the biggest customer of the airlines. And the ability to travel great distances quickly became an instrument of projecting power.

In the early days of US civil aviation the largest airline customer was the federal government in the form of the US Postal Service.

The 1925 Kelly Act authorized the Postal Service to contract with private airlines to carry the mail. That led to airlines received most of their revenue carrying mail. Often priced to the customer by the piece regardless of weight, with the government charged for weight, airlines were known to mail bricks and other large objects to themselves in other cities to pump up their revenue.

The 1930 Air Mail Act changed how mail was priced and gave broad contracting powers to the Postmaster General. The Postmaster used this power to consolidate contracts under three major airlines, forcing many airlines out of business. This came to fruition out of a 1930 meeting that became known as the ‘Spoils Conference’.

The government had dictated which airlines would survive and prosper, and awarded contracts to airlines that hadn’t been the lowest bidder. When the story of what transpired finally came out it was dubbed the Air Mail Scandal and it led to the cancellation of contracts and to the Roosevelt administration enlisting the miltary to carry mail. They weren’t equipped to do this.

Accidents and deaths followed the military takeover of air mail, and contracts were finally returned to the private sector. None of the executives involved earlier could run airlines obtaining postal contracts and so leadership was jettisoned from the airlines.

None of the incumbent carriers were permitted to carry mail, so airlines changed their names – for instance Eastern Air Transport turned into Eastern Air Lines and Northwest Airways renamed itself Northwest Airlines. In fact all the major carriers who participated in the spoils conference received their old routes back under new contracts except United — which was apparently one of the only ones innocent of collusion — and its holding company which also controlled Boeing, Pratt & Whitney, Sikorsky and more were broken apart. Bill Boeing retired in his early 50s.

The Civil Aeronautics Act in the late 1930s created a new independent Civil Aeroenautics Authority (two years later with some responsibilities split into a precursor of the FAA, it was renamed the Civil Aeronautics Board). It was given the power to regulate airfares and decide which airlines served what routes.

The CAB saw it as its mission to limit entry and protect airlines from ‘ruinous competition’. It kept fares high and prevented airlines from expanding into many routes served by other carriers.

International aviation, though, became a tool of policy. One of the best books about Pan Am was Altschul and Bender’s The Chosen Instrument: Juan Trippe, Pan Am, The Rise and Fall of an American Entrepreneur. Pan Am became known as the U.S. government’s “chosen instrument” using the airline to foster policy goals, collect information, and spread influence. Some scholars have challenged the notion, though, suggesting that Pan Am itself freelanced and influenced U.S. foreign policy rather than simply the other way around.

Regardless from the beginning U.S. airline success was intertwined with government policy which forced foreign governments to provide access to markets, which was the biggest customer funneling money to the airlines, and which protected airlines from competition.

In fact the very first major aircraft order American Airlines made was subsidized by the Reconstruction Finance Corporation as part of the New Deal. American’s Chairman C.R. Smith, later a cabinet secretary in the Johnson Administration, was best man in Franklin Roosevelt’s son’s wedding and a consummate crony capitalist.

It matters that the U.S. airlines were born in subsidy and grew as a tool of the U.S. government because the Gulf airlines today are at a similar stage of development.

U.S. Airlines Continue to Be Subsidized Today

American Airlines CEO Doug Parker personally and successfully appealed to the federal government for a bailout of America West, which went on to acquire US Airways and then American.

Parker is in charge of American in some measure because of pressure from the federal government’s pension agency during the airline’s bankruptcy. Had American offloaded its pensions in bankruptcy onto the Pension Benefit Guaranty Corporation, the PBGC would have become the airline’s biggest creditor. They pushed the creditors committee to accept an acquisition deal inside of bankruptcy rather than shedding the most costs possible, emerging from bankruptcy, and potentially doing any deal on stronger footing.

While American Airlines didn’t shed its own pensions on the federal government, billions in pension liability were moved off the balances sheets of Delta, U.S. Airways, and United in their own bankruptcies.

In the U.S. nearly all commercial airports are owned by government, and they generally share revenue with airlines for all the business activity that takes place inside. Air travel is taxed, of course, to pay for airports and air traffic control (Delta fights vigorously against shifting air traffic control outside of direct provision by the federal government). However it’s impossible to disentangle the airline industry from U.S. government. And the airline industry exercises tremendous influence over government policy in much the same way they accuse Gulf airlines of doing.

The Chairman of the House Transportation Committee was reported to date an airline industry lobbyist, and his Chief of Staff married an industry lobbyist. They provide him with campaign cash. Whenever you think for a moment that you want legislation to ‘rein in’ the industry remember that it’s his committee that will write the legislation and ask yourself whether it’s likely to do what you want it to do.

The Essential Air Service Program is a subsidy. So is the Civil Reserve Air Fleet program. So are fuel tax abatements, and marketing programs and guarantees against losses offered by airports and local governments in exchange for service. The claim that major U.S. airlines aren’t subsidized, or in bed with their governments, is simply silly on its face.

Delta’s Big Lie Documentary

Emirates, Etihad, and Qatar shouldn’t be so successful since their countries are small (“the size of South Carolina”)

They use ‘immense wealth’ to ‘take over international commercial aviation’

They are ‘unfairly crushing competition’

And this is illegal dumping

Delta says they’re “taking our jobs” and “taking our routes.” However these aren’t Delta’s routes by right. And U.S. airline jobs are at record highs.

Meanwhile Gulf carriers are largely cutting back, under attack because $45 a barrel oil means less business in their region. It’s hardly the case that they are ‘crushing’ the competition, and it’s unclear why only Delta should be allowed to do so.

The video suggests that major aircraft orders from the Gulf carriers suggest their growth is impossible by commercial standards, but they offer misleading statistics.

They focus only on widebody orders

That’s misleading because Delta itself has more planes on order than either Qatar or Emirates. And Delta and American have more planes on order than Qatar and Emirates combined, without even adding in other US airlines like United.

Delta prefers to buy used widebodies

And these aircraft orders from Boeing mean US jobs in any case

The video suggests that the Gulf carriers are already dominating Europe. But Air France itself was only partially privatized less than 20 years ago, with government ownership pushed under 50% as a requirement of merging with KLM. And Lufthansa which is cited indeed now partners with Etihad. British Airways, whose parent is 20% owned by Qatar, openly supports competition. (And statistics presented about strength of the Gulf carriers in Europe focus narrowly on Gulf traffic itself.)

Delta has great quotes from the ever quotable Qatar Airways CEO Akbar al-Baker who says absurd and stupid things. But splicing him in, wearing Arab clothing, talking about how he would ‘do business with the devil if it was win-win’ appears intended to stoke American racism. That’s consistent with Delta having raised 9/11 as justification for their cause (even as they continue to partner with Saudi government-owned Saudia).

The video scares that “at least one of the big three airlines could be in jeopardy” in the coming years from competition. Which is how competition works although of course it’s unlikely given the size of each, how much each of the big airline CEOs promise that their industry is no longer so volatile, and that the U.S. government carves out the entire U.S. domestic market and protects them from foreign competition already.

I nearly spit out my coffee when the video talked about how crucial this is for national defense, on the theory that Delta will no longer have widebody aircraft in the future and therefore will no longer be able to fly charter flights for the military. Those charters are largely a boondoggle for taxpayers, a subsidy program for airlines. In fact if anything they’d turn to smaller long range widebodies and away from larger Boeing 777s if their predictions in the video came true. United flies Boeing 787s non-stop to Singapore, for instance.

Although the claim that “the U.S. military depends on a strong commercial aviation industry” underscores the deep connection between major US airlines and the government — exactly what they criticize the Gulf carriers for.

By putting President Trump on screen promising to ‘enforce trade agreements’ they’re playing to the President’s vanity and desire to keep his own promises, though it’s not at all clear that the Gulf carriers are doing anything in violation of the agreements in fact the Obama administration appeared to conclude that they were not doing so. And in terms of U.S. priorities, working with the UAE and Qatar against ISIS is far more important for the U.S. national interest.

Gulf Airlines are Businesses Pursuing Their Governments’ Agendas

The story of Emirates, Etihad, and Qatar are different from each other, as much as United, American, and Delta would like to lump them together.

Emirates is profitable and has been for a long time. Etihad has been mostly a break-even proposition in recent times outside of disastrous investments in European airlines.

They aren’t generating a traditional return on capital, though, they’re building up commerce and tourism for the United Arab Emirates. They have to meet a commercial test, which is why their CEO lost his job and the airline has been engaged in a variety of cutbacks and is working to cut back on bad investments abroad. There’s not an endless checkbook subsidizing their efforts, but their efforts are aimed at fostering their government shareholder’s goals rather than simply extracting the most revenue possible from each flight.

Qatar is government-owned, they argue that it isn’t really ‘subsidized’ because the government’s stake is equity not subsidy. In reality the government is funding the enterprise, which is wide-ranging beyond merely air travel. And the enterprise as a whole is marginally profitable, though the airline itself likely is not.

There’s no requirement that airlines be profitable, for most of their history U.S. airlines haven’t been profitable. American CEO Doug Parker re-assures investors that the U.S. aviation industry is different now precisely because, he argues, airlines are no longer running empty flights looking only for market share at the expense of profits and beating up on each other in uneconomic ways. That’s a departure from the vast history of the airline industry which has consistently gone through boom and bust cycles wiping out all of the profit the industry has ever made.

But Doesn’t Delta Have a Point Then and Should We Care?

U.S. airline industry losses, government subsidies, or U.S. airlines benefiting from subsidies is hardly unique. Delta partners with state-owned Saudia which is larger than Etihad. It shares revenue across the Atlantic with Alitalia which has been 49% owned by Etihad. It owns a stake in China’s most heavily subsidized airline China Eastern. And it doesn’t balk at state-owned Air India flying to the U.S., or for that matter Pakistan International Airlines.

At some level it may not be ‘fair’ to Delta or American to have to compete with airlines that have deep pockets behind them, just as it’s not fair for Alaska Airlines to have to compete against Delta having moved billions of its pension liability onto the federal government’s books.

On the other hand Alaska is subsidized too, especially for intra-Alaska flights. There’s really no good way to parse out what’s ‘fair’ or who is ‘hurt’ too much by government, and it’s not the role of government to do so when it would mean redistributing income from consumers to already profitable airlines.

It’s hard to generate sympathy for Delta, an airline bully on the global stage. and it’s especially hard to be sympathetic over the unfairness towards the most profitable airlines in the world. It’s hard to get worked up over aviation jobs which are at record highs — especially when the Gulf carriers bring more people to the U.S. and their flights support jobs, their aircraft purchases support jobs (they’re bigger buyers of Boeing aircraft than Delta), and their partnerships with Alaska and JetBlue create jobs. Moreover allowing them to fly unfettered to the U.S. is crucial to retaining the Federal Express hub in the Gulf as well.

Delta wants you to take a very narrow look at jobs — a self-interested one — and ignore that current policy has supported tremendous U.S. job growth in aviation.

Ultimately there is no economic theory which supports protectionism for mature profitable industries. The push for government action against Etihad, Emirates, and Qatar is pure self-interest at the expense of US consumers. And they’re willing to do anything in furtherance of that interest whether it’s fabricating evidence in their white paper or sucking up to President Trump.

More From View from the Wing

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002.
Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

Maybe I’m naïve on this front, but it seems to me that if Delta really wanted to limit the ability of the ME3 to fly to the USA, they’d pull the heartstrings both of American racists and workers’-rights advocates by highlighting some of the more controversial employment practices used by Qatar and other airlines in the region to control their staff, both on and off-duty, especially female staff, and then lobbying to force the US government to force these companies to comply with whatever standards Delta determines are fair – or to simply ask them to ban them based on the assumption that the airlines will never voluntarily change their policies because of pressure from local governments/owners, prevailing cultural-religious norms, etc. Of course this could backfire and end up limiting flights from other airlines beyond the ME3.

Then again I’m no labor law expert, and I don’t know the extent that the ME3 have reformed their labor practices. Just saying that this could be an avenue for Delta to push more forcefully. It applies just as much to Saudia – but Delta has already proven it can be two-faced in its arguments, so I don’t see a reason why this would stop them in future.

Me me me me me. Find a tune and sing it while saying me me me me. You really are a shill. Shame on you. You care nothing about American jobs and the success of the middle class as long as your ass can sit in a seat subsidied massively by a foreign government that in no way shares American values. Me me me me me

@TruJeffie – you do realize there are actual arguments in this post, right?

What claim do you think is wrong? You say “You care nothing about American jobs” but the point is that aviation jobs are at record highs, Delta is earning record profits, and jobs at Alaska, jetBlue, and Fedex — as well as Boeing which sells these airlines planes, and the jobs at the destinations that the airlines fly to — would all be undermined by the protectionist policies Delta advocates.

If you care about American jobs you cannot support Delta’s position here, it’s about Delta’s profits, period. (And I’m no friend to the business model of the Gulf airlines here.)

as long they continunung to devalueate there skymiles program on a daily basis, I have no sympthaty to them
jfk-lax in delta one went up to 150000 skymiles triple then any other program, its a two way street if you dont care for your costomers, we dont care for you

Didn’t Delta order Airbus widebodies over Boeing? And they are preaching the saving of American jobs? Such B.S. Simple solution, do not fly Delta. I hate their frequent flyer program and their attitude!

Congrats on this great article. You should make this go to the press and get as many people to read it. Delta is disgusting and blame on others its inefficiency. Just wait to see Amtrak starting to blame the M3 for being such a crappy company. They will soon be intoruduced to the Delta culture. Oh wait,

Thanks for taking the time to write the mini history. Airlines have never been independent of government and the big ones like Delta have played the subsidy and regulation game to the max. Unfortunately they don’t have the goodwill among the flying public for this Delta style campaign to work. Even people who normally lean protectionist wonder if a little more foreign competition on domestic might force the majors to at least improve customer service.

Lies are very popular these days. Arguing with facts and logic is a pointless exercise with many as they will simply deny the validity of everything that contradicts their alternate-universe views.

Just as with Lavrov and Kislyak, Trump will say nothing to Putin about Russian interference in our election. Indeed he is probably counting on him to do it again. Even if there was no provable collusion with Russia in the last campaign, Trump’s failure to punish Russia for what it did and to take sufficient steps to deter it from repeating and intensifying its attack on our democracy is tantamount to collusion now.

Obama had it wrong. Americans are not exceptional. Our system is, but Americans are currently as susceptible to lies and demagoguery as any other nation perhaps more so.

Gary likes flying subsidized gulf carriers to concrete jungles no one wants to visit and eat Treif onboard. He doesn’t like DL either because they believe people should pay what is germane to the service they receive and do not give away so much of their product like AA and UA did in the past (what a novel concept).

Slated to fly Qatar business JFK-DOH-SIN in November for $1800 rt. I’d like to see delta (or any other US carrier) beat that. At least the ME3 makes flying easier while US3 continues to make it more and more miserable.

Your article makes me sick. You don’t understand the issues at all. Tens of billions in subsidies aren’t competition. These airlines can have a serious detriment on the US airline industry. You twisted the facts more than fox news.

Hey Gary show some gratitude for once. You were traveling on a free ticket and admitted you missed your original flight and DL opened up two revenue seats to get you back to LAX. Then you come on here and act disappointed you didn’t earn miles for a ticket you never legitimately paid for and DL bent over backwards to accommodate you.

Find me another industry that would do such a thing and a customer expects privileges they didn’t pay for and were not entitled to. They could have told you to travel standby or rebooked at higher mileage level which is what they should have done since you could have incrementally had DL lose out on a lucrative close-in booking.

@Larry aka @Josh G — I appreciated Delta opening up inventory after failing to inform of a schedule change. Which has nothing whatsoever to do with (1) whether or not they should get government protection from foreign competitors, or (2) whether the case they’re making for that government protection is even close to an honest one.

Delta and US carriers offer an inferior product.
Asian and ME carriers are better.
Delta sucks and they are crying a river. Why not UP your service and be loyal?
Remember loyalty?
So, you have become a 2nd class brand and are inferior. Up your game if you can’t take the heat.

Great article, Gary. I hope you’ll get some shorter version of this published as an op-ed, put the full version out there as a magazine article, and otherwise circulate the valuable information and arguments you offer. Keep up the good work.

I have become very tired of Delta over the last 12 months. And they had me as a refugee from USScareways too….. Yes, they are somewhat more reliable than the other two big airlines (Alaskan doesn’t fly where I want to go), but in lots of little ways they have shown me they couldn’t care less about their customers. Now pile on arrogance and chutzpah and it’s just too much. They have pushed me back to AA — not exactly the pinnacle of aviation excellence but I might call them the best house in a bad neighborhood.

I’ve never read a more myopic biased piece of self-serving pseudo-economics since the last time I read Robert Reich trying to twist economics to explain how a $15 minimum wage is actually somehow going to create employment. I don’t think you understand what bankruptcy is. How in the world could you call pensions discharged in bankruptcy a subsidy? Huh? It is hard to believe one who could think up all of these arguments hasn’t asked himself why there are no airlines on the planet who have figured out how to deliver products as good as the Mideast carriers for the price? I guess they are just aviation geniuses? My word.

I’d be more sympathetic to Delta if they didn’t outsource so many of their IT and call center jobs to offshore vendors. If they cared about American jobs, they’d hire US citizens to do their call center and IT work. Given how much of my tax money went to bail out Delta, coupled with their offshoring position, I have no sympathy.

Karma can be great, but it can also suck. Interested to see what happens in the next downturn, given how many Frequent fliers that the program has alienated.

Let’s also throw in how airport infrastructure is subsidized (a) through the FAA Airport Improvement Program annual grants ($3.3 bn in 2016 and similar numbers in recent years) and (b) tax-exempt muni bond financing. Airport costs are a relatively small percentage of total airline costs, but every bit counts. I’d also be curious what % of US carrier target international markets are really affected by the ME3 – the big ones are likely to be northwest Europe, northeast Asia (incl. China) and Latin America – and just geographically from the US it’s less practical to go via an ME hub to reach those places unless you like backtracking. So sure, ME, West Asia and perhaps SE Asia/Australasia, but I have to think they are a smaller percentage.

I greatly enjoyed the historical photos and writing. Most frequent fliers know thus agree and so thanks for speaking truthfully and writing the above up for those who’re less familiar with the situation. What indeed speaks to and matters for the layman is less choice resulting in higher fares and less quality. For those interested and able to handle the details, it’s indeed too difficult to suss out who’s getting how much of a subsidy in dollar amounts though the lengthy reports by DL’s trade group Airlines for America (clever name, as cleverly edited by lobbyists as the so-called documentary which is merely a deceivingly-edited lobbying video) and EY’s far lengthier more detailed and cited retort went a good ways towards some detail. As you correctly wrote, Gulf 3 are in a similar state of development and so let’s all be more knowledgeable fliers thus my thanks for your steady reasoned hand.

@Richard Chen — actually Delta withdrew from Airlines for America because they lacked agenda control. A4A represents not only the largest airlines but also carriers like Alaska and JetBlue which opposed Delta/United/American on this issue. And A4A supports spinning off air traffic control into a non-profit while Delta wants it to continue to be run by the government. So splits on multiple issues.

I remember Trump made a comment about the ME3 airlines that these are investments governments are making into airlines and US destinations. Trump is an investor and can easily relate to others making investments. I know the US3 airlines are referring to them as “subsidies,” but I see them more like investments that the UAE and Qatar governments are making. If a very rich US investor decided to make a huge investment into a new US airline with great service and great products and grew and expanded quickly, it could greatly hurt the US3 airlines. Would the US3 airlines complain against that airline as unfair? Probably. It would be the same thing. It’s just coming from within the US instead of outside the US. It seems like the goal of the US3 airlines is to maximize their value to US shareholders rather than to create a great product for consumers. That’s why they are crying that great-service airlines are unfair. The value they deliver to their shareholders gets weakened by competition. I think rules and restrictions by the US government (like no foreign carriers operating domestic routes, or no majority shareholders of foreigners in a US-based airline) is hindering competition and preventing airlines from having great service. When there is a monopoly, where’s the motivation to provide great service? In all fairness though, Delta seems to have better service and a better product that United and American, which would make me want to fly Delta over United or American. Yes, they’ve made SkyMiles worth less and less, but when it comes to service, product, and reliability, Delta wins. I think more competition can force the airlines to go even further with even better products, service, and reliability, which is why I believe dropping restrictions can lead to better service, products, and reliability, which is better for the consumer.

Video surprising only in the magnitude of disingenousness. This is about one thing, profit maximization. Jobs, national security, evil fur-in-ers, is al just a bunch of lobbying BS. The sad thing is that with this Administration it’s likely to succeed.

Personally I like flying Delta. It’s a very competitive business and only the strong survive. To say “Our Future Our Fight” is a catchy slogan to say the least. Quatar and some of the other airlines that have cut Delta out of flying to those areas, from what I hear provide high quality service at cheaper rates to the passengers. Yet, my loyalty is to Delta because I’m proud to say I’m an American even in these trying times with our current administration. There’s more to this than the perspective written by Gary. Because as the saying goes “opinions are like a**holes, ever body has one!” Just sayin…

The European Union has been dealing with the ME3 carriers longer than our US Airlines have. I suggest you research the impact the ME3 carriers have had on European flagship carriers and be alert to what action the European Parliment will soon vote on. It will take effort but I suggest you interview the former CEO of Singapore Airlines (profits down 65% YOY) as he can share his thoughts on this topic. Cathay Pacific just posted first loss in 5 or 6 years! Quantas is mainly a domestic airline, serving as a feeder to the UAE. This is only brief evidence which I hope displays a lack of opinion or animosity towards anyone that is working for any country. .

I realize it’s been a while since anyone has reacted to this story, but a thought I had to post: isn’t the entire industry provably moving toward more direct service and less hubbing? Aren’t the ME3 pushing an outdated model: as $199 trans-Atlantic flights become more common (and with 321 and potential NMA/797), the ME3’s survival seems to depend on “they will pay” when very few actually will. If the ME3 had to be dependent on only passengers paying their own way (as opposed to expensing it in some way) I doubt very much they would be viewed as ‘disruptive’.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel -- a topic he has covered since 2002.

Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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